Thursday, July 8, 2010

The CSO have just published the May release of the Retail Price Index. Given the large increase in new car sales we have been following, it is no surprise that the overall retail sales index is performing reasonably well.The overall index by volume is up 3.5% on the year to May, but is actually down -0.1% by value. What is of more interest is the retail sales index excluding motor trades, given how heavily weighted the overall index is toward this one sector. Motor trades make up 25% of the overall retail sales index in May.When looking at a previous release we felt that a recovery in retail sales may be imminent (retail sales climb again) but it is now clear that this has stalled. Here is the retail sales index excluding motor trades by value and volume. Although the huge decline seen in 2008 and 2009 has eased considerable, there is an absence of a real recovery.This absence of a sustained recovery is also supported when looking at the annual and monthly changes. The annual change in value index remains stubbornly negative due to effects of price deflation and increased consumer bargain-hunting. The annual change in the volume index turned positive in April but dropped back towards zero in May. Although the monthly change in the volume index has been positive for four of the past five months, the monthly change in the value index has been negative for three of the past four months.The volume index only barely rose in May (+0.1%) suggesting that the increases seen up to March have petered out. The value index fell in May (-0.4%) and does not augur well for VAT revenues which are obviously based on the value of sales.

The headline measure of price changes in Ireland from the latest CPI release may be heading towards inflation once again – the June annual CPI inflation figure of –0.9% is slightly up on the May figure of –1.1% – but the measure of core inflation we have been tracking is still very much negative. Deflation remains, though the figure did rise slightly in June. We have previously looked at this figure using the March, April and May CPI releases from the CSO. Here is the June update.The measure of core inflation excludes the impact of mortgage interest and energy products, which between them make up about 15% of the index. The June figures suggest that core deflation in Ireland is running at -2.5%, up from -2.7% in May. The measure is showing strong persistence and has been between the range of –2.5% to –2.8% for the past six months, even as the overall inflation rate has continued to move towards positive territory.

Wednesday, July 7, 2010

The following graph illustrates the destruction of employment that has occurred in the Irish labour market since the middle of 2007.

Employment in Ireland peaked in Q4 2007 when 2,138,800 people had jobs. Since then there has been a 12.6% reduction in the number employed with a reduction of 270,200 to 1,868,600.

Here are two contrasting images of jobs performance in the Irish Economy.

Amazing as it may appear these are two halves of the Irish labour market over the same time period. One shows a steady rise for three years followed by some consolidation. The other shows the same rise but then drops down at an alarming rate.

In fact for the first three and a half years of the time period this split evenly divided the numbers employed in the Irish labour force. A graph overlapping the two series can be seen here.

At the time of peak employment in Q4 2007 (and the beginning of the split in the series) the economy in the left image (call it Economy One) had 1,082,600 employed and the economy in the right image (Economy Two) had 1,055,100 employed – a difference of only 27,500 or 2.5%.

The most recent Quarterly National Household Survey (QNHS) for Q1 2010 tells us that Economy One had actually added a small number of jobs with total employment standing at 1,086,000, an increase of some 3,400 jobs. On the other hand Economy Two has seen employment destruction on a vast scale with 271,300 jobs lost or 25.7% of the total, bringing the numbers employed down to 783,800.

So what is the divide between these two economies that has seen one show steady employment during the recession, with the other losing more than one in four of all jobs? The division comes from the 13 sectors included in the QNHS employment data based on the NACE classifications.

The sectors in the left column have either added employment or seen the numbers employed fall by less than 10%. The distinguishing feature of the five sectors on the right is that they have seen number employed fall by more than 10% since the employment peak of Q4 2007.

So while it is true to say that Ireland has been going through a deep recession, from an employment numbers perspective it has been a half-recession with the loss of jobs limited to half of the economy (1 in 4 jobs lost) with the other half relatively unaffected (and actually adding a small number of jobs).

Tuesday, July 6, 2010

The upward trend that we have been following in new car sales continued into June according to the most recent figures released by the Society of the Irish Motor Industry (SIMI).New car sales in the first half of the year are over 21,000 ahead of sales in the same six months last year. Sales are still way down on where they were in 2007 and 2008 but now there is a clear and growing divergence between the 2009 low and the 2010 line.

This release from Eurostat on European food prices caused a minor stir last week when it revealed that Ireland had the second highest food prices in the 27 countries of the EU behind Denmark.

Danish food prices are 39% ahead of the EU average, while in Ireland we pay 29% above the EU average. In contrast UK prices were 3% below the EU average. The cheapest food prices were in Poland which are 36% below the EU average.

The media reaction was overwhelmingly negative with many reviving the image of “Rip-off Republic”.

To be honest, this didn’t quiet sit with me. I cannot say that I feel hard done by for the price I have to pay for food. I sought some hard evidence to support my anecdotal feeling. I got it from the United States Department of Agriculture’s Economic Research Service.

A table on their website gives the percent of household final consumption expenditures spent on food, alcoholic beverages, and tobacco that were consumed at home. The 2007 version of the table is available here with the data for the EU combined with the Eurostat data in my table below.The table includes only those 22 countries that are common to both data sets. Thus Finland, Luxembourg, Malta, Romania and Cyprus are omitted. The Price column give the food and non-alcoholic beverages price in relation to the EU average (EU27 = 100). The Spend column gives the percentage of household expenditure that goes on food. Also note that the Price data relates to 2009 and the Spend data to 2007 but this is not likely to significantly change the findings.

Country

Prices

Spend

Denmark

139

10.7

Ireland

129

8.2

Austria

116

10.3

Belgium

115

13.3

Germany

111

11.4

France

110

13.7

Italy

108

14.5

Sweden

104

11.7

Greece

101

14.5

Netherlands

98

10.3

Spain

97

13.6

United Kingdom

97

8.6

Slovenia

96

14.9

Portugal

92

17.3

Latvia

85

19.2

Slovakia

81

17.9

Estonia

80

16.1

Hungary

79

17.1

Czech Republic

75

16.2

Lithuania

74

23.8

Bulgaria

68

20

Poland

64

20.6

What do we find?

Yes, Ireland does have the second highest absolute food prices in the EU, but as a percentage of total consumption Ireland has the cheapest food in the EU!!

Food prices may be high in Ireland but only 8.2% of our household consumption expenditure goes on food. We have the remaining 91.8% of expenditure to buy other things (that we probably couldn’t afford in the first place!). Poland has the cheapest food in the EU, but food exhausts over 20% of their household expenditure. They have less than 80% to spend on other stuff.

According to the USDA table, in 2007, on average Irish households spent $2,160 on food and had $24,036 to spend on other things. In Poland the average household expenditure on food was 36% less at only $1,375. We can assume that this is as a result of the lower prices rather than lower appetites. However in Poland there was only $5,300 left to spend on other things. Ireland has substantially higher food prices, but this is more than offset by our substantially higher incomes.

We saw a €3 billion ‘improvement’ in the Exchequer Balance in May 2010 compared to last year. This was attributable to the frontloading of a €3 billion contribution to the National Pension Reserve Fund to finance the recapitalisation of AIB and BOI.The June Exchequer Returns that have just been released indicate a further €3 billion ‘improvement’ in the state of the public finances.Can we explain why the red line for 2010 is outperforming the green line for 2009? We haven’t turned that big a corner. As with the May ‘improvement’ the June equivalent is easy to explain. In June 2009 we poured €3 billion into the nationalised Anglo Irish Bank. This was included in the June 2009 Exchequer Statement. We are continuing to pour money into Anglo but this is under the contrived construct of Promissory Notes and does not appear on the Exchequer Accounts (yet!). The EU Commission may yet rule that these transfers to banking sector have to be included in the Exchequer Accounts and the improvement shown above will instantly evaporate.The creative accounting techniques used in the overall Exchequer Balance mean it is of little use in analysing the state of the public finances. A more instructive measure, and one slightly less open to manipulation, is the Exchequer Current Account Balance. How has that been faring out given the steps that have been taken to restore order to the public finances?That does not look good. The Current Budget Deficit up to June 2010 is €831 million or 11.5% worse than it was by the same time last year (a deficit of €8,045 million in 2010 versus one of €7,213 million in 2009). The public finances continue to deteriorate.Last June there was a monthly current budget deficit of €767 million. This year the equivalent monthly deficit was slightly worse at €803 million. With tax revenue up on the same month last year, this increase in the deficit is due to an increase in current expenditure.Last June, Current Expenditure was €2,930 million while this year it was €3,403 million. Timing issues allays the weight we can put on these monthly comparisons. In the first six months of the year Current Expenditure was €19,655 million. This is only 1.9% or €376 million below the 2009 figure of €20,031 million.Of this €19.7 billion in Current Expenditure some €5.9 billion or 30% of the total has been current Social Welfare Expenditure. This is the only area to show an increase in current expenditure.This graph does not compare like with like, as a March reorganisation of government Departments saw the budget of the state training agency, FAS, come under the remit of the newly named Department of Social Protection. Even before this change current social welfare expenditure was rising but the surge in the past few months is due to the reorganisation rather than a further acceleration of social welfare spending.

Last Friday the Department of Finance published the Exchequer Statement for June. The gives us a picture of tax returns for the first half of the year. It appears to me that the rate of decline in tax revenues has eased dramatically and we may not be too far from some real stabilisation. Prepare for death by tables in the following analysis! The usual graphs are also produced.The source documents are:

Most of the mainstream commentary focused on €227 million or 1.6% shortfall relative to the Department of Finance forecasts. This is only a small part of the picture. What is of more interest is the performance of tax revenues in the first six months of 2010 relative to the same period in 2009. Comparisons of cumulative tax revenues are given in the first table below. Here we see that by the end of June tax revenue is almost €1.4 billion or 9% below tax revenue from last year. Just because most of this deterioration was expected does not detract from the nature of the decline.This deterioration is seen across all the main tax headings. Only the relatively insignificant Capital Acquisitions Tax shows an improvement in performance relative to last year. All other taxes are down. Most significant are the large drops in Income Tax and VAT, both of which are down almost half a billion euro on last year.If we look at the more immediate figures and look what has happened in June alone we see that tax revenue in June was slightly up on the same month last year. This is the second time in three months that this has happened. It should be noted that April and June are non-VAT months, and the fall in May means that revenues for the second quarter are still 1.4% below those from the same quarter last year.Again the standout figure is the poor performance of Income Tax. And we see that for four of the eight tax headings the quarterly comparison is positive. The 1.4% drop for Q2 is a major improvement from the first quarter when tax revenue was 15.0% behind the 2009 figure (€7,236 million versus €8,510 million) and the comparison for all eight tax headings was negative. Is this a sign of stabilisation after all? So far in 2010, tax revenue is €1,377 million behind revenue in the same six months of 2009. However €1,275 million or 92.6% of this drop occurred in the first three months of the year. The second quarter only accounted for €103 million or 7.4% of the total drop. The first three months of the year were catastrophic in terms of tax revenue but there does appear to have some degree of relative stabilisation since then.If we return to the monthly revenues for June and examine the individual tax headings we can see that the 1.5% increase relative to June 2009 was driven entirely by a 16% jump in Corporation Tax revenues. Companies paying preliminary Corporation Tax in June are those who have a year end of the 31st December. It remains to be seen whether this is a precautionary move on the part of these companies or whether they actually will have a higher Corporation Tax liability in 2010. Again we see the continuing poor performance of income tax relative to last year. Most other tax headings are relatively unimportant in June. The Department of Finance had been predicting a slightly better June, and tax revenue came in €80 million or 3.3% below the Department’s June forecast. However, this was actually the best of the Department’s forecasts of the year so far.Looking at the individual tax forecasts we see that the Department’s forecasts for June held up quiet well in all cases, except one. The Department forecast most of the jump in Corporation Tax but continued to underestimate the fall in Income Tax receipts. Excluding income tax the forecasts were close to accurate but the Department expected 10% more Income Tax to be collected.The information note published with the returns may suggest that the Minister is relatively satisfied with the Department's forecasts and that “Budget Day targets remain valid”. However, after almost coming in on target in April (only 0.1% below target) the gap between cumulative tax revenues for 2010 and the Department’s forecasts of same has been widening. It was 1.2% in May and was 1.5% in June. And remember these are targets that already forecast a 6% drop in the annual tax take.It will be interesting to see what will happen over the next few months. Without doubt the poor performance of Income Tax receipts will continue. July is a VAT month and one wonders whether the improvement to a drop of only 1.3%, compared to the same month last year, seen in May will persist. For those who prefer a visual representation of the figures here are some graphs that show the pattern to tax revenues for the past three years. First, here’s total tax revenue. The red line showing 2010 tax revenues continues to slip below the green line showing 2009’s dismal tax revenue when compared the 2007 and 2008 figures.Here are the same graphs for the individual tax headings. Click individual graphs to enlarge. Constantin Gurdgiev provides some analysis of these exact graphs here.